Submitted by Chris Hamilton via Charles Biderman TrimTabs' blog,
US is Bankrupt: $89.5 Trillion in US Liabilities vs. $82 Trillion in Household Net Worth & The Gap is Growing. We Now Await the Nature of the Cramdown.
There are many ways to look at the United States government debt, obligations, and assets. Liabilities include Treasury debt held by the public or more broadly total Treasury debt outstanding. There’s unfunded liabilities like Medicare and Social Security. And then the assets of all the real estate, all the equities, all the bonds, all the deposits…all at today’s valuations. But let’s cut straight to the bottom line and add it all up…$89.5 trillion in liabilities and $82 trillion in assets. There. It’s not a secret anymore…and although these are all government numbers, for some strange reason the government never adds them all together or explains them…but we will.
The $89.5 trillion in liabilities include:
- $20.69 trillion
- $12.65 trillion public Treasury debt (interest rate sensitive bonds sold to finance government spending)
- Fyi – $5.35 trillion of “intra-governmental” Treasury debt are not included as they are considered an asset of the particular programs (SS, etc.) and simultaneously a liability of the Treasury
- $12.65 trillion public Treasury debt (interest rate sensitive bonds sold to finance government spending)
- $6.54 trillion civilian and Military Pensions and Benefits payable
- $1.5 trillion in “other” liabilities http://www.fms.treas.gov/finrep13/note_finstmts/fr_notes_fin_stmts_note13.html.
- $69 trillion (present value terms what should be saved now to make up the present and future anticipated tax shortfalls vs. present and future payouts).
- $3.7 trillion SMI (Supplemental Medical Insurance)
- $39.5 trillion Medicare or HI (Hospital Insurance) Part B / D
- $25.8 trillion Social Security or OASDI (Old Age Survivors Disability Insurance)
- Fyi – $5+ trillion of additional unfunded state liabilities not included.
Source: 2013 OASDI and Medicare Trustees’ Reports. (pg. 183), http://www.gao.gov/assets/670/661234.p
These needs can be satisfied only through increased borrowing, higher taxes, reduced program spending, or some combination. But since 1969 Treasury debt has been sold with the intention of paying only the interest (but never repaying the principal) and also in ’69 LBJ instituted the “Unified Budget” putting all social spending into the general budget reaping the gains in the present year absent calculating for the future liabilities. If you don’t know the story of how unfunded liabilities came to be and want to understand how this took place, please stop and read as USA Ponzi explains nicely… http://usaponzi.com/cooking-the-books.html
$81.8 trillion in US Household “net worth”
According to the Federal’s Z.1 balance sheet http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf, the US has a net worth of $81.8 trillion – significantly up from the ’09 low of $55.5 trillion…a $23 trillion increase in five years. Fascinatingly, “household” liabilities are still $500 billion lower now than the peak in ’08 but asset “valuations” are up $22.5 trillion. All while wages have been declining. A cursory glance at the Federal Reserve’s $4 trillion in balance sheet growth in the same time period shows how the lack of growth in “household” liabilities (currently @ $13.7 trillion) has been co-opted by the Fed.
I believe it’s clear when incomes no longer supported credit and debt growth in ’08, consumers tapped out and in stepped the Federal Reserve to bridge the slowdown. But what the Fed may or may not have realized is once they stepped in, there was no stepping out.
(Charles, would be great if you could export this chart from FRED to be included…or if you have a better idea to show this relationship, would be great???)
How We Got Here – Growth of Debt vs. GDP
45 years of ever increasing debt loads, social safety net growth, corporate welfare. 45 years of Rep’s and Dem’s in the White House and Congress bought by special interests and politicians buying citizens votes with laws enacted absent the revenue to pay for them. We have a Treasury and Federal Reserve willing to “innovate” and wordsmith to avoid the national recognition of the true difficulties and implications of our present situation. 45 years of intentionally avoiding an honest accounting of our national obligations, mislabeling, and misdirecting to pretend these obligations can and will be honored. 45 years of cornice like debt and promise accumulation simply awaiting the avalanche of claimant redemptions and debt repayments.
First, an historical snapshot for perspective of the last time US Treasury debt was larger than our economy (debt/GDP in excess of 100% in 1946) and subsequent progress of debt vs. GDP…and why anyone suggesting there is a parallel from post WWII to now is simply ill informed.
Post-WWII:
- ’46-’59 (13yrs)
- Debt grew 1.06x’s ($269 B to $285 B)
- GDP grew 2.2x’s ($228 B to $525 B)
- ’60-’75 (15yrs)
- Debt grew 2x’s ($285 B to $533 B)
- GDP grew 3.3x’s ($525 to $1.7 T) Income grew 3.3x’s ($403 B to $1.37 T)
- ’65 Great Society initiated, ’69 unfunded liabilities begin under a “Unified Budget”
Post-Vietnam War:
- ’76 -’04 (28yrs)
- Debt grew 15x’s ($533 B à $7.4 T) Unfunded liability 15x’s ($3 T to $45 T)
- GDP grew 7.3x’s ($1.7 T à $12.4 T) Income grew 7.4x’s ($1.37 T to $10.1 T)
- ’05 -’14 (9yrs)
- Debt grew 2.4x’s or 240% ($7.4 T à $17.5 T) Unfunded liability 1.5x’s ($45 T to $69 T)
- GDP grew 1.4x’s or 140% ($12.4 T à $17 T) Income grew 1.4x’s ($10.1 T to $14.2 T)
- Z1 Household net worth grew 1.25x’s from $65 T to $82 T…
If the trends continue as they have since ’75, Treasury debt will grow 2x’s to 3x’s faster than GDP and income to service it…and the results would look as follows in 10 years:
- ’15 – ‘24
- Treasury debt will grow est. ($17.5 T à $34 T to $44 T)
- GDP* will grow est. ($17 T à $22 T to $24 T)…income growth likely similar to GDP.
* = I won’t even get into the overstatement of economic activity within the GDP #’s…just noting there is an overstatement of activity.
So, while the Treasury debt growth rate skyrocketed from ’05 onward and the GDP growth slumped to its lowest since WWII, the unfunded liabilities grew even faster.
Drumroll Please – Total Debt/Obligation growth vs. Debt
Let’s go back to our ’75-’14 numbers and recalculate based on total Federal Government debt and liabilities:
- ’75-’14
- debt (total government obligations) grew 33x’s 168x’s ($533 B à $17.5 T $89.5 T*)
- GDP grew 10x’s ($1.7 T to 17 T)
- Household net worth grew 15x’s ($5.4 to $82 T) while median household income grew 3x’s (est. $17k to $51k) while Real median household income grew 1.13x’s ($45k to $51k)
*$89.5 T is the 2012 fiscal year end budget number, the 2013 fiscal year end # is likely to be approx. $5+ T higher, or debt grew 180x’s in 40 years vs. 10x’s for GDP / income….but seriously, does it really matter if debt grew at 10x’s, 16x’s, or 18x’s the pace of the underlying economy…all are uncollectable in taxes and unpayable except for QE or like programs.
Why Can’t We Pay Off the Debt or Even Pay it Down?
Take 2013 Federal Government tax revenue and spending as an illustration:
- $16.8 Trillion US economy (gross domestic product)
- $2.8 Trillion Federal tax revenue (taxes in)
- $3.5 Trillion Federal budget (spending out)
- -$680 Billion budget deficit (bridged by sale of Treasury debt spent now and counted as a portion of GDP)
- = $550 Billion economic growth?!?
- PLEASE NOTE – The ’13 GDP “growth” is less than the new debt (although the new debt spent is counted as new GDP) and the interest on the debt will need be serviced indefinitely.
Why Cutting Benefits or Raising Taxes Lead to the Same Outcome
While many try to dismiss these liabilities assuming we will continue to only service the debt rather than repay principal and interest; assuming we turn down the SS benefits via means testing, delaying benefits, reducing benefits; assuming we will bend the curve regarding Medicaid, Medicare, and Welfare benefits; assuming we will avoid further far flung wars and military obligations and stop feeding the military industrial complex; assuming no future economic slowdowns or recessions or worse; assuming a cheap and plentiful energy source is found to transition away from oil. But all these debts and liabilities are someone else’s future income they are now reliant upon; someone’s future addition to GDP. If these debts or obligations are curtailed or cancelled to reduce the debt or future liability, the future GDP slows in kind and tax revenues lag and budget deficits grow. Of course I do advocate these debts and liabilities cannot be maintained, but austerity (real austerity) is painful and would set the stage for a likely depression where the nation (world) proceeds with a bankruptcy determining what and how much of the promises made can be honored until wants, needs, and means are all brought back in alignment.
So What’s it All Mean?
Let’s get real, austerity is not going to happen and we aren’t going to balance the budget. We’re never going to pay off our debt or even pay it down. We’re rapidly moving from 4 taxpayers for every social program recipient to 2 per recipient. And ultimately, now we aren’t even really paying the interest on the debt…the Federal Reserve is just printing money (QE1, 2, 3) to buy the bonds and push the interest payments ever lower masking the true cost of these programs. Of course, interest rates (Federal Funds Rates) have edged lower since 1980’s 20% to todays 0% to make the massive increases in debt serviceable.
Politicians and central bankers have shown they are going to print money to fulfill the obligations despite the declining purchasing power of the money. It’s not so much science as religion. A belief that infinite growth will be reality through unknown technologies, innovations, and solutions that in four decades have gone unsolved but somehow in the next decade will not only be solved but implemented. Because it is credit that is undertaken with a belief that the obligation will ultimately allow for future repayment of principal, interest, and a profit. But without the growth, the debt cannot be repaid nor liabilities honored. Without the ability to repay the principal, the debts just grow and must have ever lower rates to avoid interest Armageddon. This knowledge creates moral hazard that ever more debt will be rewarded with ever lower rates and thus ever greater system leverage. The politicians and central bankers will continue stepping in to avoid over indebted individuals, corporations, crony capitalists, cities, states, federal government from failing. It is a fait accompli that a hyper-monetization has/is/will take place…and now it is simply a matter of time until the globe either becomes saturated with dollars and/or reject the currency (so much to discuss here on likely demotion or replacement of the Petro-dollar and more…). Because the earthquake (unpayable debt and obligations) has already taken place, now we are simply waiting for the tsunami. Forget debt repayment or debt reduction…forget means testing or “bending cost curves”…we’re approaching the moment where even at historically low rates we will not be able to pay the interest and maintain government spending…without printing currency as this generation of American’s have never seen. Bad governance and bad policy coupled with disinterested citizens will demand it.
Epilogue – So Where Do you put your Money?
No one can really know what will have value in this politicized crony capitalistic system as the hyper-monetization ramps up…all I can suggest is to hedge your bets with some physical precious metals, some minimal leveraged real estate, but also stocks and bonds and even some cash…because although there are natural forces in favor of the tangible, finite goods…there are also equally determined forces bound to push bond yields down, real estate and particularly stock prices up. Unfortunately, the more you know, the more you know you don’t know…invest and live accordingly.
